What lessons have we learned on how to manage business risk?

Mark Mansfield,
Heath Lambert

Having read a lot recently about the Great Depression of 1930s, it is tempting to say that the recent economic issues show that we haven’t learned much about how to manage risk over the last 80 years. However, there are some lessons that I hope we can remember in the future:

Business risk is not the sole responsibility of one individual
Despite the rhetoric of many highly paid consultants, no one knows what the future will bring. The only way to manage future risks therefore is to get a wide range of ideas and debate throughout the Board and across professional advisers. Crucial to this is the encouragement of critical thinking. We have known since the 1950s about the effects of Groupthink, and yet we know that individuals sought to minimise conflict rather than admit they didn’t understand the securitisation of sub-prime mortgages.  

Businesses must plan thoroughly
Whilst the sequence of events leading to the current problems would have been very difficult to predict, its effect on reducing credit markets, reducing sales and loss of suppliers, could all have been identified as risks and then mitigated. Risk is a continually moving spectrum and as such, management of it is a daily activity.   

What we can’t understand, we can’t manage
At the heart of the US issues was the basic issue that people were happy to take on risks that they didn’t understand. The same applies to us all. Those that will come out of this period the strongest will be those with leaders who truly understand the nuts and bolts of their operations and their market.

Beware of focusing on the latest trend
Already we have seen a regression to worrying only about the ‘topic of the week’ in the latest scenario Swine Flu. Whilst this is important, it has to be taken into context with all the other business risks that are no less dangerous or imminent just because they are not in the papers.

Importance of the external environment
No matter what business we work in, we are all linked in a global interdependency. Too often, insurance programmes and business contingency plans are inward facing and do not account for the effect of suppliers, customers or neighbours.

Finally, we have to remember that risk and opportunity is really the same word from a different perspective. Almost by definition, society will tend to see only risks in a recession. Those businesses with strong management teams and cash are starting to pursue opportunities and maybe the greatest advantages will come to those who learn to manage risk evenly across the whole of an economic cycle.